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The article demonstrates an economic recession in the local economy that started due to a fall in the private consumption expenditure of Mr Ajani. A decrease in one aggregate spending component translated into reductions in other components. Thus, the overall fall in income is higher than the initial fall in Mr Ajani鈥檚 expenditure. The effect is due to the presence of a multiplier.

Changes in income are directly related to the change in investment and consumption, per the multiplier effect. The declined income due to declined consumption further reduced the investment capacity of the economy. Thus, the investment in the local economy declined because Humbug backed out from investment in the landscape. The decline in investment further lowered the local economy鈥檚 income, and again the private consumption fell as the landscaper refused to consume TV.

The initial reduction in one aggregate spending component spreads to the whole economy. The economy gets trapped into a recessionary phase, where low consumption leads to low investment, output, income, and again low consumption. This cycle of lower spending inducing lower-income repeated for many rounds demonstrate the multiplier effect.

Similar to the economic recession due to the fall in spending, an economy might go through vigorous economic expansion if the economy constantly keeps receiving increment in spending and induced increase in income following the multiplier effect.

An increase in income due to an increase in consumption and investment expenditure will further increase the consumption and investment capacity of the economy. So investment and consumption increase the economy鈥檚 income multiple times. Suppose the process of multiplied income effect repeats itself over a longer period. In that case, the economy鈥檚 income and output will expand rapidly, and the economy will pass through an expansionary phase.

Therefore, a positive multiplier effect will lead the economy towards expansion.